Lower GDP Target, Higher Tax Cuts in China but Business Leaders are more Optimistic

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China lowers its 2019 economic growth target to 6% - 6.5%, and at the same time plans to cut billions of dollars in taxes and fees after the slowest growth of 6.6% in 28 years it had in 2018.

According to Chinese Premier Li Keqiang at opening of the National People’s Congress (NPC) on Tuesday, Beijing will cut nearly 2 trillion yuan (US$298 billion) in taxes and fees for companies this year, up 53.6% from last year’s 1.3 trillion yuan (US$194 billion).

The government will also cut value-added taxes to support the following sectors:

manufacturing (from 16% to 13%)

transport (from 10% to 9%), and

construction sectors (from 10% to 9%)

This year, the government has set a budget deficit target of 2.8% of GDP, up from last year’s 2.6%.

Stimulating Consumption, Easier access to funds for Small Firms

China also aims to stimulate consumption with a consumer inflation target of about 3%, versus the current sub-2%.

In terms of monetary policy, Lee said the government will keep it neither too tight nor too loose, and will not resort to a flood of stimulus while growth in M2 money supply and total social financing this year will be in line with nominal GDP growth.

Last year, China had already lowered commercial lenders’ reserve requirement ratio (RRR) five times to make borrowing easier for small and private firms.

Smaller firms can expect to have easier access to funds as the premier said that China aims to increase lending to them by large commercial banks by more than 30% this year.

While Li noted that the country will deepen interest rate reforms and lower real interest rate levels, he didn’t give any specific details.

At the same time, the state planner National Development and Reform Commission said China will resolve the shadow banking risks in an orderly way while steadily dealing with

China CEOs are the only business leaders who are increasingly optimistic

China isn’t the only economy that has reported slower growth. Last week, the US also reported 2.9% GDP growth for 2018, which fell short of the 3% of the Trump administration.

As the two largest economies in the world have slowed and their trade war results in more uncertainly, both IMF and World Bank have lowered forecast for the global economic growth in 2019.

The global economy is projected to grow at 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage point below last October’s projections.

IMF cuts its 2019 global economic growth projection to 3.5% while the World Bank has an even lower projection of 2.9% and 2% for advanced economy.

However, CEOs in China are more optimistic than their counterparts from other countries about the global economic growth.

According to PwC’s recently published 22nd Annual Global CEO Survey China Report, 73% of CEOs in mainland China believe that global economic growth will improve, compared to 41% of CEOs in Hong Kong and 42% globally. The report is part of a bigger survey conducted between September and October 2018, which collected responses from 176 executives based in mainland China and Hong Kong. 

This is the only economy among the major territories surveyed who were more optimistic this year than the last, PwC pointed out.

CEOs in China are also confident of revenue growth despite global economic slowdown, according to the company.

More than one-third (35%) of mainland Chinese business leaders feel “very confident” in their company’s prospects for revenue growth over the next 12 months.

A higher proportion (47%) of CEOs is confident about their company’s growth prospects over the next three years.

Trade tension remains the primary concern

When asked about the biggest economic, policy, social, and environmental threats to organizations’ growth prospects this year, trade conflict was the primary concern for 78% of the Chinese CEOs surveyed, followed by policy uncertainty and geopolitical uncertainty (73%), and protectionism (72%).

As a response to the trade conflict, many mainland Chinese CEOs are adjusting their supply chain and sourcing strategy (70%) and shifting their growth strategy (52%) as well as production (40%) to alternate territories, PwC observed.

CEOs' changing strategy: Less reliance on the US

The impact of trade conflict has prompted Chinese CEOs to become less reliant on the US and instead look for growth opportunities elsewhere, said Frank Lyn, PwC China and Hong Kong Markets Leader.

For mainland Chinese CEOs that have invested abroad in the past and will continue to do so, or those hoping to start in the future, the top three geographic regions that are a priority for outbound investments are Belt and Road countries (59%), Asia Pacific (56%) and the European Union (47%).

In terms of the ranking of attractiveness of countries as being most important to their organization’s overall growth prospects over the next 12 months, for mainland Chinese CEOs, Australia was ranked first this year, while the US dropped to second place from top position in 2018, followed by Japan.